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Sun TV Network - Investment Thesis

Sun TV Network Limited, which started off as a TV broadcaster, is a media conglomerate with interests in TV broadcasting, DTH, radio, movie distribution and also owns an IPL franchise. Its TV presence is through 33 channels across 4 southern states, with pan India radio network through its partnership with Red FM. Among media companies in general and TV companies in particular, Sun TV network has had stellar financials in last many years –

Sun TV offers below bouquet of channels -
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Company has had interesting origins. Its promoter, Kalanithi Maran, is a nephew of M Karunanidhi, the late patriarch of DMK, one of the 2 main regional parties in the state of Tamil Nadu. Sun TV started its operations at the time when channels were broadcasted to viewers through cable TV. Channel broadcasters would give channel feeds to MSOs (the regional cable operators) who further rent these feeds to the local cable operators responsible for connecting individual households.

Cable TV business at the local level in densely populated areas of top cities / towns had largely been an enterprise with criminal aspects like strong arm and meaningful links to the local politicians. Same ingredients made a local operator as profitable as Buffett owned CapitalCities – significant operating leverage. Cost to the local TV operator to add a household was near zero since all he had to do was attach a wire to the existing feed, with MSO having no way to determine the actual number of viewers since cable feeds, like airwaves could be reshared indefinitely. Residents got cheap cable and a cable operator got fat profits, with the loss borne by the preceding value chain – MSOs, broadcasters and content producers. This was the genesis of digitization (set top box essentially tracks channel feeds)

Keeping the above in mind, its only with a sense of wonder that one starts to appreciate how Sun TV upended this model to create wealth. Apart from the listed business, promoters of Sun TV also own Tamil Nadu’s largest MSO Sumangali Cable. Although financially not large, Sumangali Cable serves as a critical platform for Sun TV, since through its MSO, not only is the company able to keep a leash on the local cable operators, but it also accords preferential treatment to channels under Sun TV, and is also alleged to have resorted to unfair means for this preference. This resulted in Sun TV, the flagship channel, having a numero uno position in terms of viewership in all of India, since it was the recipient of the best content in Tamil and other south Indian languages along with getting its pick of the regional movies in the form of perpetual licences (11,000 movies in library)

This can further be illustrated by its business model – for the longest, Sun TV was the only network that followed private producer (PP) model, whereby it charged a fixed fee to a content producer for a slot on the network, with the content producer taking the inventory risk as the advertisement revenue went to him (30minutes programming / 3mins ad slot). Its only recently that Sun TV has pivoted to commission model, followed by the industry, where Sun TV buys the rights of a show outright and profits through advertisement revenue. This move is also an indicator of growing competition among TV channels in the south markets.

A cable monopoly cannot function without political backing, and political upheavals have had a major impact on its cable operations (non listed part). Due to a family spat, DMK, heading TN government brought about its own cable company called Arasu Cable in 2008, looking to nationalise cable television (like it did with alcohol distribution) and get even with the promoter family. Arasu Cable was shut after the spat ended but was again revived in 2012 after the AIADMK, the main opposition party came into power and looked to undermine Sun TV cash cow. However, Arasu cable has not been very successful due to factors like high tariffs, low local operator participation and delay in licence from Central Government. Political risk rose to its peak, when in 2015, the Central Government refused to grant security clearance to all Sun channels citing a criminal probe on the promoter on the 2G scam.

Even operationally, with digitisation and DTH, there has been a fillip to the entry of national players in regional TV, Sun TV’s market share has been declining over the years.

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Source – MOSL report dated 12 Feb 2018

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Gemini TV belongs to Sun

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Udaya Channels belong to Sun

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Surya TV belongs to Sun. Source: https://www.indiantelevision.com/television/tv-channels/viewership/2018s-most-watch-south-indian-channels-190129

As a reader, one might raise a pertinent point – with its presence across 4 states, why do we analyse the TN business in depth? Sun TV does not report state wise or segment wise details, and based on the ad rates and domicile, it appears that Tamil operations bring in much larger share of revenues –

The above are dated charts from an LKP report from Mar 2014 and are added to highlight the differences in ad rates across markets.

Does Sun TV Network have a competitive advantage? TV broadcasters employ economies of scale whereby the largest broadcaster can out bid competitors for quality content (show/movie rights), thereby attracting more eyeballs and larger adspends. The scale kicks in not only in terms of fixed programming costs but also the yield in advertising characterised by increased ad rate per slot. However, more money does not necessarily translate into better content, and since prime time is centered to 8pm – 10 pm slot in India, there are mostly 4 shows that drive channel viewership.

Sun TV, through its own cable, DTH (Sun Direct), movie production as well as political backing had an incredible control over its entire ecosystem / distribution which now seems to be waning with onset of DTH and national competition. The moat of a business is always shifting, and in case of Sun TV, it appears to gear towards erosion owing to its distribution losing relevance. We have not even considered a movement towards streaming where the content becomes more important than distribution, already upending broadcasting businesses world over, since a household in South India watches television for 4 hours and 14 minutes everyday, 77% of which is movies and serials. Further, while advertisement revenues have been lacklustre, subscription revenues are on the rise –

Source – Annual reports, All numbers in INR crores)

The IPL Foray – Unlike diversification in unrelated businesses, Sun TV Network’s IPL foray seems to have worked out well when it purchased the Hyderabad franchise in 2012. As per the purchase consideration terms with BCCI, Sun TV paid out 85 crores for the first 5 years, post which the payout is 20% of the franchise income for next 5 years. Based on the renewal of sponsorship –

Sponsor Name Rights Amount Excess over previous
Star TV Telecast and Digital 16,300 crores 3x
Vivo Title 2,200 crores 4.6x

A minimum of INR 150 crores (21 mn USD) per franchisee is expected to be shared by BCCI which makes almost all teams profitable. Combined with gate tickets and sponsorship revenue, with no fixed fees, SUN TV’s IPL operations have turned profitable from 2018 (loss making for first 5 years). Company has already expensed out the INR 425 crores [85 crores * 5years] (60mn USD) fixed fees, so with no capitalisation of costs (as observed in United Spirits Ltd.)

Sun TV is often called out for the large payroll made to its promoters – 176 crores (25mn USD), which takes out 5% of its sales and 11% of its profits, but the question I grapple with is – can company’s current scale help it flourish without its promoter backing? With the realization that its competitive advantage is on the decline, even at the valuation below, I would be very sceptical of owning a stake in the company.

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I hope the long read has been rewarding for you. Feel free to get in touch in case of any feedback or data. Happy Investing!

I write thesis like this here -

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Nice post @bozo_investor.
What are your comments on the digital business?
Do you know if management has the caliber to build a tech business (media business in the future will be media-tech business)?

Their website SunNxt looks off and the industry is shifting towards Digital. I follow Telugu content regularly and the Telugu content available in SunNxt doesn’t look impressive at all. Amazon Prime and ZEE5 have much better Telugu content including originals. I don’t know about Tamil content.

Though I don’t think the cable business will vanish entirely, but a decade later, I feel fairly confident that digital businesses will take over cable. I wouldn’t assign any terminal value to the business if there is no strategy to create a digital business.

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They are leading in tamil content. Whenever they are in power or opposition are weak they will have the cini industry in full control. Look at 2006-2011 you can see almost 65-70% distribution rights of the released movies are under their banner. They do have print media (Dinakaran daily/kunkumam weekly) but not that much popular.

Kalanidhi maran is a very good business man but their political link is a red flag for me

Nice write up. I guess they have new channels in Bangla and Marathi which got started recently. Sun TV,K TV,SUN MUSIC and ADITHYA are no#1 in TN. Their news channel not able to gain because of huge competition in that space.

While the charts say that Sun TV has number 1 viewership in TN, ground reality is shifting & shifting fast in last few years. Zee Tamil is certainly canabalising the prime time 6 to 10 PM that Sun TV had a grip for 2.5 decades.

Zee Tamil market share in TN has gone from 4% to 24% in 4 years and its only going up.
DMK returning to power (likely) could give a boost to Sun, but at present, they are stale in TN when it comes to programming.

From an investment point of view, if Zee promoter issue is sorted, I would rather put my money on Zee than Sun.

Disc : Native TN & never voted for DMK. So my views could be subconsciously biased against Sun. :slight_smile:

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Thanks @lingalarahul7!

with the rise of streaming, i think the value is migrating from distribution to content. Sun TV, was never in the content business, and that i think, is definitely a negative, since digital bypasses the entire chain created by Sun TV. I agree with your point on the business having a low terminal value.

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Thanks @aruncph!
yes, true that, there are 2 reasons for the same - Zee got a lot of success with this show called Naayagi (the first non Sun TV No. 1 show) and also they have been out spending Sun TV in acquiring movie rights. however,the ad rate differential between the 2 is still more than 2x.

Any specific reason on why you would go for Zee?

Thanks @Raawake for your inputs!

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Preference for Zee is 2 folds
i) Valuations - current drop in price is purely down to Promoter issue. Core business is not affected and is doing well in this carnage
ii) In key south Indian markets, Zee is capturing more market share year on year. While ad rates could be low in case of Zee Tamil to Sun, but fact is, if the trend continues, over the period, ad rate should also go up

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okay, makes sense. thanks!

Sun tv q320 call rough notes

revenues

340 cr advertrsing; pay channels 205 cr (17% or 70% growth yoy …? this should stablise here deals with all MSOs), dth 207 cr (flat yoy for q3), movies; 15 cr, international subscription : 41 cr; movie production revenues 15 cr

sun next has become profitable. : we had indicated 150 cr investment from 2019 to 2021…we haven’t spent anything till date…we are showing same content only from tv

Sarkar movies last year Dec 18 qtr : 109 cr of revevnues…this year 15cr movie distribution

PBT drop 15 cr.

GRPs up to 1000 …Chennai 2000…back to peak ratings

degrowth in ad revenues Is better than market. higher rating…

Feb-Jun 2019…we were 38%… now in Jan 2020 this is 47% (we pushed strong shows and movies) our internal goal is to surpass 50-52% share in TN and 5-6% increase in other regional markets. Dip also was due to distribution. in Bangla we are no.3…we have improved significantly…in 1 year…

subscription will grow steady state 10-12% from current 410 cr. that’s it. in 9 months

we will look to increase dividend…but more keen for buybacks. buybacks make more sense…its a no brainer.

Pitch madision projecting 6-7% ad growth for next financial year

Radio : everybody in a very tight spot…spending from govt…taken big hit…

60% of Netflix veiewrship is from HBO, Disney, NBC (friends/office)…every broadcaster starting own streaming, Disney’s service cheaper than Netflix.

high speed broadband 6% penetration in India

300-350 rs…400-500 channels. 3 hours one tv homes. cheapest broadband home is 700 rs. 150 gb… 1000 rs for 300 gb. then will want sony liv…and hotstar…1200 rs monthly outlaw…versus cable and DTH…is 1/3rd……5% of Indian population can afford this 1200 rs.

for us…sun next is a new platform…additional distribution. we will go that way…if we realise…ppl want

JIO 100 cr a year and a large free OTT player…and one more a large Fibre player…to use all Sun tv content . break even. no new content spent today. we intend to spend 150 cr by 2021…on new content

our subscription revenues…will include from OTT…subscription revenues is gonna be a on a tear

7 shows is telecast…model…from 11 shows…last year…this will also come down…we had said 2 years…we will go to full commissioned model

cable subscription revenues 165 cr out of 205 cr subscription

RADIO is ON VERY BAD SITUATION

RADIo big shakeout going to happen…many players… up for sale.

4 will be left in 8 player market…market will tilt…consolidation. nothing looking good soon

TV …due to resurgence in our ratings and bonuses from advertisers…we can see some improvement in TV

Q3 tv ad revenues decline 10-12% for industry …according to sun tv assessment

3000 cr cash : we are not evaluation any M&A right now…we will right size the cash balance…we don’t need cash to do M&A also if something comes upption domestic subscription revenues should be growing 10-12% even with NTO 2 (this qtr yoy growth is 18% in subscription/ 9 months is 16% subscription growth)

ENTIRE BLOCK of south india hh: 5.4 cr

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The primary risk on the stock is re the new pricing impact (NTO) and if the earnings are going to hold steady:

https://finance.yahoo.com/news/edited-transcript-suntv-nse-earnings-225527525.html

No, no. See, again, it’s too long to put a number. See like, who would have imagined when the NTO came in, the complete disruption has happened. So we – as we see now, as we pull our Excel sheet, this is what it is. But any change or plus or minus from the regulatory authorities can completely change your Excel sheets, right? As we have the present basis which the distribution team has worked out, this is what we’re looking at. It can change overnight if there’s going to be any direction either way from the government or the concerned regulatory authorities. Assuming this is the NTO which is in force or in vogue without any further changes, this is what we’re looking at. But it can always change depending on any changes on the ground, which we have observed and no control on.

I don’t think this is correct, management never said that. NTO 2.0 has not been implemented and they don’t know what will happen if it gets implemented. I called up the IR and this is what they told me. The transcript is here:
https://finance.yahoo.com/news/edited-transcript-suntv-nse-earnings-225527525.html

Zee in their call also if I remember correctly gave some 10% growth number adjusting for lower NTO but being cautious saying we don’t know yet
Rs.19 channel will not be put in bouquet so loss of revenue for those who don’t want

V. C. Unnikrishnan, Sun TV Network Limited - CFO [174]


For 9 months, right? So this number, I’m putting it at a lower end of 10% to 12% on an annual basis. See because we do not know what further disruptions can come from the NTO going forward, we’re not aware of that. So this 16%, I’ve put it at lower end of 10% to 12%. The annual – yes. No, I’m not comparing taking this base. I’m saying on an annual basis, the subscription revenue should be up in the range of 10% to 12%.


Sonaal Kohli;Bowhead Investment Advisors;Managing Director and Founder, [175]


Oh, I see, over a period of time. This is not something specific quarter you were referring to…


V. C. Unnikrishnan, Sun TV Network Limited - CFO [176]


No, no. I’m not taking – your question is, whether this is the base taken and adding 10% or so. That’s not what I’m saying. I’m saying, we should – our revenue line of domestic subscription should give around 10% to 12%.


Sonaal Kohli;Bowhead Investment Advisors;Managing Director and Founder, [177]


And this is a long-term growth rate over the next couple of years you’re referring to? Or…


V. C. Unnikrishnan, Sun TV Network Limited - CFO [178]


No, no. See, again, it’s too long to put a number. See like, who would have imagined when the NTO came in, the complete disruption has happened. So we – as we see now, as we pull our Excel sheet, this is what it is. But any change or plus or minus from the regulatory authorities can completely change your Excel sheets, right? As we have the present basis which the distribution team has worked out, this is what we’re looking at. It can change overnight if there’s going to be any direction either way from the government or the concerned regulatory authorities. Assuming this is the NTO which is in force or in vogue without any further changes, this is what we’re looking at. But it can always change depending on any changes on the ground, which we have observed and no control on.


I hold this stock and I believe the key growth trigger for this company will be the movies it will release in tamil nadu (these also have a good following in other south indian states) in the next 5 years. Sun understands this market well and the promoters are close to the ruling party which adds to its ability to churn out quality movies with top stars. Already 7 movies are in the pipeline till next year (starring top stars Vijay, Rajnikant (2 movies), Dhanush, Vijay Sethupathi, Sivakarthikeyan, Surya) - (most likely >1400 crores of investments). The effect of full recovery from COVID will most likely result in people thronging to the movie theaters atleast for the next 2 years. All this bodes well, in my opinion.

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Are they competing with Amazon, Netflix in addition to other studios? The earnings won’t be stable because not all of their movies will be successful right? I am concerned about the variability of success in these projects. Also, these seem to be big budget movies. Here is a podcast on a production house that does the opposite of big budget movies to make a good return on investment.

Blumhouse, run by Jason Blum, makes movies on tiny budgets. They make a lot of movies, and many of them sneak straight to video, if you know what we mean. But somehow, they keep making hits. And it’s happening more often. Get Out, for example, cost about $4.5 million to make, which is extremely cheap for Hollywood. Since it opened in February, it has grossed nearly $150 million.

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Hi Forum,

Based on my observation, the company have some huge potential for growth. Because their business category’s are FM,TELEVISION,MOVIES,CRICKET. These all are peoples essential.
So i think they are going to beat the street.

1,FII and DII has decreased their holdings.
2,However Public increase their holdings.
3,Management has announced dividend for this month.

Happy investing!!

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Q1 concall call rough notes:

Cash on books : Around 3900 cr

Dividend policy : Will stick to historical payout ratio of around 50%. Last year 15% was a conservative measure considering pandemic as they will try to maintain their historical superior ROCE ratio.

Movies production : 5 movies in final stages (Rajini, Vijay, Surya, Dhanush & Vijay sethupathi). Total budget around 600 cr. Rajini movie slated to release by Diwali. Remaining movies will be released after that in 4-5 months. These will be dubbed and theatrical release will be simultaneous in South states. They have more avenues of monetization now through OTT partnerships for their blockbuster content.

Accounting change : Changed the practice of amounting movie production charges in single go to Amortizing them over useful life of first 4 years at ratio 30:30:20:20. Equally divided between quarters within a year. Just following the best practice followed internationally by all media houses.

Subscription growth: Cannot give guidance as they wait for the litigation result from court. Still the effect of result will be minor on existing revenue. But growth will be there ‘definitely’

Advertisement growth: Still any regional or national player cannot think without Sun tv advertisements in order to promote their new products or boost sales. So once pandemic is over, growth can be expected. They still charge more than other players considering the superior market share. Digital advertisements through OTT and social media cannot have the mass appeal that they have as still majority South Indian families watch TV and they have the best penetration. Hence their advertisement revenue will not be affected.

TV Content : Betting big on new non fiction shows Masterchef tamil and telugu. KBC in telugu by Junior NTR. Their strategy to attract young age viewers.

Sun NXT Growth : Plans for original content production postponed because of pandemic. Investments will be done as they understand the importance. They still have good amount of subscriptions for their live TV content, Movies library and Serials.No Plans for webseries or new age contents as of now. They have partnership with telcos for package viewerships. But those packages will not have full access to their library.

FM and other medium revenues: Not much discussed in con call. But overall industry in downtrend. Consolidation happening from 8 to 4 players. IPL Revenue is partial because of postponement.

Disclosure : Invested. From South.

7 Likes

I am starting my thesis on this stock: I frame my work on four broad subjects. Growth, Promoter quality, Business quality, Valuation.

Before starting, I just try to reason why Market, the future focussed machine has been undervaluing the media sector.

Major reason for underperformance of this sector in recent bull run is the wide perception that Vintage media channel’s terminal growth rates are diminishing.

Factors:

1)Internet access and OTT Platforms

  • Why watch tv when you have a whole world in your mobile

  • Why watch local channels when you can watch international content in one click

  • Why wait for time slots and tolerate ads when you can Binge watch anytime and chill

2)Fierce competition and Content makers are the King

  • Eventhough there is stickiness of particular channels, Shows and time slots in Mass media, People can get attracted to a better content anytime.

  • With increase in competition as getting Satellite rights/ Channel subscription is neither cumbersome or costlier as in older days, Number of competitors are only increasing

  • Fierce competition only decreases the pricing power and profitability of these companies as with increase in social media - Disruptions and Virals are very easy with good content.

3)Regulation controls (TRAI and Government)

  • TRAI , BARC, Sensor board and Government - Their pricing power and content freedom is challenged every now and then.

  • Political alliance(Alleged alliance maybe) of most media companies can be a threat to them anytime when tables turn.

  1. Unpredictability and B2B dependence:
  • Revenue and Margins are not stable because of the obvious above factor and the Market share shifts. Their Revenue pie of Ad revenue depends on the well being of Other consumer based companies . Their Subscription revenues again depends on the well being of economy and consumer’s willing to subscribe.

So considering the above factors ( It would be great to know the other factors too that I have missed which might be reason for the low valuations ), I am starting my thesis on Sun tv network in next post.

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Valuation:

CMP : 512
Market cap: 20170 cr

Revenue:
FY 19 - 3783 cr, FY 20 - 3520 cr, FY 21 - 3177 cr
OPM - 70% Average

Cash in books: 3900 cr (As per q2 concall)
Debt: Zero
P/E ratio: 12.4
Dividend Payout ratio (5 yr average - 16-20): 46.2%

ROCE Average (5 yr average) - 35.26%

Compounded Sales Growth
10 Years: 5%
5 Years: 5%
3 Years: 2%

Compounded Profit Growth
10 Years: 7%
5 Years: 14%
3 Years: 10%

Equity dilution/ Fund raisings : Never
Promoter stake : 75% (Never decreased in History)

WC days : 102 days
Cash conversion cycle : 142 days

A simple DCF Model with 8% discount rate and Terminal growth rate of 2% and growth rate 2% and FCF of 1600 cr gives an intrinsic value of 696 per share.

At a TTM EPS of 42 - Dividend payout of 50% (As per q2 concall) would translate to a dividend of 21 rs for a share of 512 considering no growth. ( Like a 4% FD rate). Also they have deferred Divident payout for FY21 considering Covid uncertainties which also will be paid out soon as the management intends to maintain their ROCE ratios.

I will continue my next framework Growth:
On current favourable situations, Imminent growth prospects and future potentials in next post.

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